Intel spent nearly 10 years and hundreds of millions of dollars to develop Itanium, but the first version of the chip has faced slow sales so far.

In the third quarter--the first full quarter of Itanium sales--manufacturers sold just $13.7 million worth of servers containing the chip, which comes to less than 500 servers, according to market researcher IDC.

By contrast, Gartner research shows that 2,601 Itanium servers were shipped in the third quarter, an increase over the three shipped in the second quarter. The discrepancy between the IDC and Gartner figures apparently comes from the fact that companies have shipped many Itanium servers for demonstration purposes.

The Itanium's humble start, while not completely unexpected, underscores the immense challenges that lie ahead for Intel, allied computer manufacturers and software developers that are gunning to make Itanium the standard for complex computing in the next decade.

Intel says it isn't disappointed with the sales numbers.

"We're pleased with the acceptance of Itanium to date," a company representative said Tuesday, adding that sales should increase once Compaq Computer, one of largest server manufacturers, starts selling computers with the chip.

Ambitious beginnings
Itanium, one of the most ambitious launches in
Intel's history, is designed to run large databases and complex applications such as those that simulate weather patterns and require expensive RISC/Unix servers from the likes of Sun Microsystems or IBM.

Ideally for Intel, Itanium servers will become cheaper, more powerful and will contain
wider array of software than they do now.

The chip contains an entirely new architecture that processes data in 64-bit chunks, rather than 32 bits like standard Intel chips. As a result, computer makers must design entirely
new computers for the chip, while software developers must spend time and effort to make their existing applications compatible.

The problem is most of this work isn't complete yet, and as a result, sales of servers remain low.

"This is going to be an incredibly long ramp," said Dean McCarron, principal analyst at Mercury
Research. "We expected it to do a little better, but not a lot better."

Added Hugh Jenkins, vice president of marketing in Compaq's industry standard server group: "It is going to take a couple of years for the operating systems and applications to be made available...and for customers to tune their own applications."

Jenkins sees 2003 and 2004 as the "real prime time of 64-bit applications."

Itanium has also been hurt by a slow economy and delays. Originally due in the mid- to late 1990s, the first version of the Itanium, code-named Merced, finally came out at the end of May.

Partly because of the delays and partly because of performance issues, Merced has largely become a test vehicle for future versions of the Itanium.

The next version, code-named McKinley, will be more powerful than Merced. McKinley is set to come out in test systems in the first part of next year and commercially toward the middle of 2002. Madison, an improved version of McKinley, is expected to arrive in 2003, along with a low-power budget version of the chip, code-named Deerfield.

With McKinley, sales are expected to begin picking up. By the third quarter of next year, McCarron predicts that Intel could be selling a "couple hundred thousand (chips) a quarter."

But the expense involved in making McKinley--along with other factors--could keep sales of the upcoming chip moderate too.

Kevin Krewell, an analyst at MicroDesign Resources, predicted that the company will sell around 100,000 Itanium chips per quarter by the end of 2002.

By contrast, the Pentium Pro, Intel's first server chip, was selling 500,000 units a quarter after four quarters. And its Xeon chip went from zero to 500,000 units in four quarters. These chips, though, had smaller price tags than Itanium.

One of the reasons for McKinley's bigger price tag, Krewell said, is that it will cover nearly 440 square millimeters in area--or more than twice that of the Pentium 4.

"One problem is that McKinley...is expensive to manufacture. It
also means yields are lower," he said. "Not until you get into Madison and
Deerfield in 2003 do you start talking about volume."

The Intel representative, however, countered Krewell's assertions. Size is somewhat irrelevant when it comes to server chips, the representative said, because of the much higher cost of servers. McKinley will be larger than Merced, he said, but the additional space allows the chip to contain more cache memory and computing units.

Competition at home?
Ironically, one of Itanium's biggest competitors won't be Sun, but the Xeon line itself. Xeon already sells well and is compatible with existing software.

Customers are also sold on Xeon. Glenn Bonner, chief information officer of Mirage Resorts, noted in an interview last month that Xeon-based machines can effectively handle most corporate computing tasks.

A new version of Xeon for four- and eight-processor servers is coming in the first quarter. The chip will run at 1.5GHz and 1.6GHz, according to sources, and contain Hyper Threading, a new
technology that can increase performance up to 30 percent by using internal computing elements
of the chip more efficiently.

"Unless there are applications that are really compelling on Itanium, Intel is making its job harder
and harder" through the continual improvements to Xeon, said Tim Shetler, vice president of
marketing at TimesTen, which develops databases.